The change in the outlook reflects the erosion of the country's external financial position following imposition of sanctions by the US and other countries in response to the nuclear tests carried out last week, S&P said.

"While the country's ample foreign currency reserves -- about $25 billion, or twice its stock of estimated short-term debt -- should allow it to absorb the near-term impact of sanctions, India's balance of payments could come under increased strain in the medium term from reduced inflow of both official and private capital," it said.

S&P said reduced access to concessional loans, which now comprise nearly 43 per cent of the country's external debt, will increase the country's dependence on higher cost private-funding.

Sanctions and heightenedregional tension could also reduce the flow of foreign direct and equity investment, "which have typically exceeded India's modest current-account deficit in recent years and facilitated a reduction in its external debt burden to about 165 per cent of exports from 243 per cent in 1994," S&P said.

Combined with a poor export performance -- exports grew only 3 per cent last year -- the recent decline in the country's external debt burden is likely to be halted, if not reversed, S&P said.

With regard to the negative outlook, S&P said "a ratings downgrade could occur if economic sanctions materially worsen the country's access to external funding, lower its growth prospects, and exacerbate its already high fiscal deficit."

Our bureau adds: It may be mentioned that soon after the nuclear tests S&P chief rating officer Leo C O' Neil had told The Financial Express that the fundamentals of the economy were strong enough to withstand any pressure arising out of the economic sanctions. The sanctions willnot have any long- or medium-term impact.

"At this point these tests do not call for any downward revision in India's rating," he had said after the first nuke test.

The agency, while rating the Power Finance Corporation's ECB programme, had confirmed the outlook on India's long-term foreign currency ratings of BB+ and local currency rating of BBB+ as stable. It had, however, said that the new BJP-led coalition government is likely to continue with cautious liberalisation but faces serious challenges in strengthening public finances and reforming the public sector. Moody's may follow suit, very soon. Moody's had already assigned a negative outlook to India's foreign currency in March, 1997. Earlier this year, Moody's had threatened to review the country's rating for a possible downgrade.

Scrips dip on kerb

The news of Standard &Poor's downgrading the rating outlook triggered selling in key counters like ITC, State Bank of India, Reliance and Tata Tea. ITC was down by Rs 1.75 from its officialclose of Rs 797.75.

State Bank lost marginally by 50 paise at Rs 256, while Reliance was down to Rs 180.50 from Rs 181. Tata Tea, another bellwether stock, which was up on the kerb earlier at Rs 388 (official close Rs 377.50), reacted sharply to fall to Rs 381Calcutta operaters were learnt to have gone short soon after the news broke out. Market analysts said the Sensex could dip by as many as 100 points on Monday.

Not an important development, says IDBI's Khan

MUMBAI, May 22: The downgrading of the country's foreign-currency rating outlook may see a further slide in the rupee vis-a-vis the dollar and selling pressure by FIIs. Though post-sanctions, the financial markets--including the money and stock markets--have weathered the storm, analysts and brokers see the the pre-budget rally in stocks not materialising.

However, IDBI chairman SH Khan was confident that there would not be a major impact on the financial markets. "It is not at all an important development for India. Corporates are notborrowing foreign currency resources due to the exchange-rate fluctuation now. IDBI has enough resources to fund Indian corporates for the next six months. Anyway, sanctions are a short-term measure; so also is S&P's latest announcement." Khan was quick to point out that it would be the US institutions that will be at a loss.

SBI Caps managing director AR Barwe concurs with Khan's views. He does not see any major fallout immediately. "It won't have any further impact on the cost of the foreign currency borrowing, which has already gone up by over 300 basis point over Libor."